In a furious race to shore up as much liquidity as possible, Glencore - which a month ago announced a dramatic deleveraging plan - and its peers have been quietly scrambling to raise billions in secured funding. Case in point none other than Glencore's biggest competitor and the largest independent oil trader in the world, Swiss-based, Dutch-owned Vitol Group, whose Swiss unit Vitol SA earlier today raised a record $8 billion in loans.

"In the event of a downgrade by Standard & Poor’s and/or Moody’s from current ratings to the level(s) immediately below... there are $4.5 billion of bonds outstanding, where a 125bps margin step-up would apply, in the event that the bonds were rated sub-investment grade by either major ratings agency."

Earlier today, in its latest attempt to restore confidence in its brand and business model after suffering a historic stock price collapse, Glencore - whose CDS recently blew out to a level implying a 50% probability of default - released a 4 page funding worksheet which was meant to serve as a simplified summary of its balance sheet funding obligations and lending arrangements to equity research analysts who have never opened a bond indenture, and which among other things provided a simplified and watered-down estimate of what could happen if and when the company is downgraded to junk.

Meanwhile, in a furious race to shore up as much liquidity as possible, Glencore - which a month ago announced a dramatic deleveraging plan - and its peers have been quietly scrambling to raise billions in secured funding. Case in point none other than Glencore's biggest competitor and the largest independent oil trader in the world, Swiss-based, Dutch-owned Vitol Group, whose Swiss unit Vitol SA earlier today raised a record $8 billion in loans.

Louis Dreyfus Commodities, the world’s largest raw-cotton and rice trader, said in its interim report last month that it had six revolving credit facilities with staggered maturity dates totaling $3.3 billion. In June, it amended and extended its North American facilities totaling $1.6 billion and in July it refinanced a $400 million Asian lending facility with the company securing an option to request an increase of $100 million.

Noble Agri, the agricultural commodity trader majority owned by China’s Cofco Corp., attracted four new lenders to its $1.58 billion one-year revolving credit facility, people familiar with the matter said this month.

In short - a race against time to pledge as much unencumbered collateral as possible for future funding needs, because as every CEO knows you raise capital when you can, not when you have to. Yet this is odd, because even as the companies hold investor meetings and publicly comfort investors that they are adequatly funded and see no need for a liquidity-raising scramble, that's precisely what the world's commodity traders are doing.

Bloomberg's take was more optimistic: "The transactions show banks are still eager to loan money to commodity traders even after debt concerns caused by wild swings in Glencore’s stock and bond prices."

The new loans and refinancing signal banks are comfortable lending to commodity traders, whose business models allow them to profit from volatility and lower financing costs amid weaker prices for raw materials.

According to Bloomberg, Vitol’s record credit facilities from a group of 57 banks were increased by a third after the initial $6 billion sought by the trading house was oversubscribed by $2.7 billion, the Rotterdam-based company said in a statement. The facilities, refinancing a debt package signed 12 months ago, are the biggest in the firm’s 49-year history, a Vitol spokeswoman in London said.

Then comes even more spin:

The loan package, coming after Trafigura last week agreed to lower lending rates, suggests some analysts don’t understand the business of trading houses, which can benefit from lower commodity prices and the current contango market structure that allows them to profit by storing oil because forward prices are higher than current costs.

Actually analysts (at least credit) understand the business of trading houses very well; what Bloomberg's reporters don't seems to understand, however, is the principle of muturally assured megaleverage destruction, or the implied threat for a company's secured lending syndicate that a borrower which already has billions of exposure to banks has all the leverage in demanding even more debt. After all, should Vitol fail, it would lead to a cascade of bank failures as all the banks that have lent money to the giant commodity trader are forced to charge off their exposure, in the process leading to serial defaults among undercapitalized financial institutions.

It is these institutions whose credit officers underwrote the loans, that are the ones who "don't understand the business of trading houses" because based on the recent collapse in publicly traded securities, they never modelled what happens to cash flows in a world in which the price of oil, copper, zinc, aluminum or other commodities, suffer a 50%+ plunge in prices.

“Given the recent turbulence in the commodities space, we have been repeatedly asked by investors on the banks’ exposure to commodity traders,” analysts at Sanford C. Bernstein led by Chirantan Barua wrote in a note Monday.

As they well should, and in order to avoid answering, the banks are perfectly happy to throw a little more good money after lots of bad money in order to avoid remarking their entire exposure to the sector to something resembling fair value.

But the day of remarking is coming: as Bernstein calculates, commodity traders have raised at least $125 billion of debt, of which about $75 billion is loans. In other words, there is about $75 billion in secured debt, collateralized by either inventory and/or receivables collateral whose value has cratered in the past year, and as a result the LTV on the secured loans has soared. It is this that is prompting the panicked banks to be more eager to provide funds to the suddenly distressed energy-trading sector than even the borrowers themselves. And after all, if the banks do blow up, there is always the taxpayer-funded bailout as a last reserve.

And here is a pop quiz to either analyst, or Bloomberg writers who don't "understand the the business of trading houses" - if you issue secured debt to shore up liquidity as a result of what is fundamentally a massively overlevered capital structure, does the pro forma debt increase or decrease. This is not a trick question.

The good news for the Vitols of the world is that by pledging even more of their unencumbered assets to banks, they buy themselves a few more months, or quarters, of liquidity to pay down upcoming maturities and interest. Which is what Glencore did with its "doomsday" plan in early September... a plan which calmed the stock for all of two weeks before investors saw right through it for what it was: a desperate scramble to put lipstick on a declining-stage supercycle pig.

In the meantime, the end result is this: companies that are even more levered to commodity prices in a world in which at last check commodity prices, a proxy for China's economy, are sliding. Which, incidentally, was our thesis in March of 2014 when we said that buying Glencore CDS is the best way to trade China's hard landing. This is precisely what happened.

Which is why both the companies, and their lending banks, better pray that commodity prices pick up in the coming weeks and months, because for the Vitols, the Glencores, the Trafiguras, the Mercurias and so on, that is all that matters. Ironically, by levering up even more, they bought themselves some time now, but if and when the next leg down in the commodity supercycle takes place, the pain will only be that much greater.

As part of its ongoing scramble to defend itself against "speculators" and concerns about its balance sheet, earlier today Glencore released a 4 page "funding worksheet" detailing all of its obligations.

Among the highlights was Glencore's disclosure of total available liquidity as of this moment, which the firm reported to be materially above its June level of $10.5 billion:

At 30 June 2015, available committed liquidity was $10.5 billion (p. 71 of 2015 Half-Year Report). As of today, committed available liquidity is materially above June’s level, given the recent $2.5 billion equity placement, the business generating positive free cashflow and the ongoing focus on delivery of the various other debt reduction measures, including lower net working capital. Further delivery of the debt reduction programme, including the $2 billion target for asset disposals, will similarly enhance liquidity levels.

It also presented its sources of funding among which the well-known $31.1 billion in bonds, as well as $20 billion in short-term funding split between a $15.25 revolver (of which a "substantial portion" is undrawn), $1.2 billion in AR/Inventory secured funding, and $3.4 billion in bilateral bank facilities. Glencore was quick to point out the gullibility of its bank lenders: "No financial covenants, no rating events of default or rating prepayment events, no material adverse change events of default or material adverse change prepayment events."

Next Glencore details the terms of its notes and cross-guarantees which it lays out as follows:

$36.5 billion notes outstanding at 30 June 2015, including $1.9 billion maturing in October 2015. See Appendix for full details.

Notes are issued on a pari passu basis, applying a cross guarantee structure introduced at the time of the Xstrata acquisition (see Moody’s and S&P reports dated 7 May 2013 and 19 June 2013, respectively).

Following the Xstrata acquisition, legacy Xstrata bonds (issued by Xstrata Finance (Canada) Limited, Xstrata Canada Financial Corp, Xstrata Canada Corporation and Xstrata Finance (Dubai) Limited) also now have guarantees from Glencore plc and Glencore International AG, implemented by way of supplemental indentures.

Similarly, the outstanding USD notes issued by Viterra Inc. in August 2010 have guarantees in place from Glencore plc and Glencore International AG.

Glencore also notes the $17.9 billion in Letter of Credit commitments it had outstanding as of June 30:

As part of Glencore’s ordinary sourcing and procurement of physical commodities and other ordinary marketing obligations, the selling party (or Glencore voluntarily) may request that a financial institution act as either a) the paying party upon the delivery of product and qualifying documents through the issuance of a letter of credit or b) the guarantor by way of issuing a bank guarantee accepting responsibility for Glencore’s contractual obligations.

The LC is not incremental exposure to that already reported in the financial statements. An LC is only a “contingent” obligation, disclosed as such in Glencore’s financial statements i.e. becomes a liability in the event that Glencore does not perform on an already recorded liability. The underlying transaction / procurement liability is recognised within “Trade Payables” in Glencore’s balance sheet. At 30 June 2015, $17.9 billion of such LC commitments have been issued on behalf of Glencore, with the respective liabilities reflected within the $28.1bn of recorded accounts payables. The contingent obligation settles simultaneously with the payment for such commodity. Availability is substantially higher, such that the vast majority of these Glencore facilities remain undrawn.

An interesting tangent is when Glencore discusses it readily marketable inventories:

Represents those marketing inventories that are contractually sold or hedged. At June 30 2015, total inventories were $23.6 billion, of which Marketing RMI were $17.7 billion.

For corporate leverage purposes Glencore accounts for RMI as being readily convertible to cash due to their very liquid nature, widely available markets and the fact that price exposure is covered by either a forward physical sale or hedge transaction.

Which brings up the very interesting question: with Glencore touting its revolver availability, and its various secured facilities, just how is Glencore marking the fair value of its inventories, because a ton of copper a year ago as collateral is worth just a little bit more than a ton of copper currently. We are confident Glencore's banks are aware of this.

But finally, and most importantly, Glencore presents what it believes would happen if it is downgraded from Investment Grade to Junk. This is what it says:

Glencore is undertaking measures to strengthen its balance sheet, including a material debt reduction, that the company expects shall serve to protect and maintain a strong BBB/Baa credit rating.

In the event of a downgrade by Standard & Poor’s and/or Moody’s from current ratings to the level(s) immediately below, a ratings’ grid in the $6.8 billion 5-year revolving credit facility provides for a modest additional margin step-up. As this 5-year revolving credit facility is expected to remain fully undrawn, the net additional effect would only be 35% of this modest step-up margin, being the applicable commitment fee only. The maximum margin for sub-investment grade rating from either Standard & Poor’s or Moody’s is 1.10%. There is no ratings grid in relation to the $8.45 billion revolving credit facility. In addition, there are $4.5 billion of bonds outstanding, where a 125bps margin step-up would apply, in the event that the bonds were rated sub-investment grade by either major ratings agency.

Which reminds us of the waterfall analysis being shared around in the weeks before the AIG downgrade unleashed a series of events that ultimately led to the insurance company's bail out. It too presented glowing picture of the potential risks. In the end it was very deficient. One can only hope that Glencore has learned the lesson of never misrepresenting the worst case scenario.

GLENCORE TIMELINE

HEADLINE DETAILS & LINKS

respectively. Elsewhere, following a strategic leak over the weekend by the Telegraph that Glencore ... On a company specific basis, Glencore (+6.0%) lead Europe higher after talk that the Singapore ... While there is pressure on Glencore’s balance sheet given low commodity prices, the stress doesn’t mean ...

After its biggest daily crash in history on concerns Glencore's (or Glenron as it has been called ... current price), which said it sees real economic value in both of Glencore’s businesses - clearly, hence ... is that "commodity trading" has not lost value at all, but it is Glencore's commodity trading that ...

Back in July, long before anyone was looking at Glencore (or Asia's largest commodity trader, ... a rhetorical question: Which will be first: Trafigura, Mercuria or Glencore — zerohedge ... we have our answer: for now at least, Glencore, which is now flailing and which Bloomberg reported ...

Now that after long last the market has turned its attention not only to Glencore's mining ... report . But before we get into it, here is a reminder of Glencore's most recent disclosed financial ... breakdown ofGlencore's "fair value" breakdown in Level 1 through 3 assets, which amount to $4 billion in ...

AsiaPac in the early going. Noble Group (asia&#39;s Glencore) is crashing, down 6.7% at the open. FX ... Glencore, just as we warned... If you like GLEN CDS, you will love NOBLE http://t.co/itRvATiSFf ... worstGlencore since Noble: worst Glencore since Lehman … well, he is a famed ...

Glencore is in total free-fall across all markets today. Most worrying for systemic risk concerns ... exposures . Forthe first time since 2009, Glencore CDS are being quoted with upfront pricing (something ... (or 14% upfront) to buy protection against a Glencore default (which implies - given standard ...

carnage in massive commodity group Glencore began to materialize. Glencore CDS is now above 700bps (up ... Cargill will own Glencore Cargill will own Glencore before this is all done............. Ah ...Glencore. It's a private Company and doesn't need to play the Wall Street games. OK but I&#039;ll ...

Update: And there it is: GLENCORE DEBT INSURANCE COSTS SURGE TO RECORD HIGH; 5-YR ... Switzerland-based Glencore which just two weeks ago unveiled an unprecedented " doomsday " capital raising and ... commodity prices drop 5%, or even stay where they are, then Glencore's investment grade rating - the most ...

previously , following a surge in its Credit Default Swaps, the "doomsday" scenario for Glencore is now on the table, because the market suddenly realized that Glencore's most valuable asset, not its mines, or ... "commodity Lehman" scenario for Glencore, which much more than a simple copper miner just happens to be one ...

Two weeks ago, in a stunning development, Glencore officially folded the towel on not only its ... current recession in commodity prices. As a result, Glencore CEO Ivan Glasenberg unveiled a $10 billion ... blow up currently in progress, tumbled from a level in the mid-400s to 300 bps on hopes Glencore would ...

on Monday when Glencore's CEO Ivan Glasenberg - formerly a perpetual optimist in all things commodity ... for commodity prices. Glencore's unprecedented action was in direct response to an S&P ... 2.0x target, Glencore's CDS tumbled by nearly a third in the past 4 days. And then, something bad ...

the end" for Glencore (which just days earlier Bank of America calculated would need a $12 billion ... step for Glencore would indeed be a collateral waterfall-inducing downgrade, one which would have sent ... changed: S&P: GLENCORE TO BBB/NEGATIVE FROM BBB/STABLE As a reminder, Glencore is the ...

Update: even the rating agencies finally noticed - S&P: GLENCORE TO BBB/NEGATIVE ... Levered) Way To Play The Chinese Credit-Commodity Crunch ?" We were referring to Glencore credit ... Chinese/commodity crash as a result of Glencore massive exposure to the price of copper, which in its own words ...

One month ago we asked: Which will be first: Trafigura, Mercuria or Glencore — ... Glencore may have top-ticked the commodity supercycle with its 2011 IPO, but it's been downhill ever since ... three months, substantially underperforming its peers Rio Tinto (which Glencore once tried to acquire) ...

of what we said 17 months ago in an article laying out Glencore CDS as the best way to trade the ... Glencore has a huge $55 billion of debt, is drastically sensitive to copper (and other commodity) prices, and its CDS remains just off record tights . Is Glencore the most ...

Glencore, which last year concluded its merger with miner Xstrata creating the world's fourth largest mining ... weak pricing environment ," the company said. Glencore chief Ivan Glasenberg For ... months,Glencore is not only the dominant coal exporter in the global coal market, but one which has ...

none other than Goldman Sachs (and Glencore) have simply incredible waiting times for delivery of the ... Pacorini Metals is owned by commodity group Glencore Xstrata and Metro International Trade ... the LME will not entirely shock that none other than Goldman Sachs (and Glencore) have simply ...

In what could be the biggest merger news of the year, Bloomberg reports that Glencore and Xstrata could be close to a merger: GLENCORE SAID TO BE NEAR AGREEMENT TO COMBINE WITH XSTRATAGLENCORE, XSTRATA MAY ANNOUNCE DEAL AS SOON AS THIS WEEK COMBINED XSTRATA, GLENCORE MAY BE WORTH $82 ...

little uglier for the biggest IPO of 2011. In just its second day of trading, Glencore has already broken its IPO price. Reuters reports: &quot;Shares in commodities trading group Glencore fell below ... speculators and Glencore would have been the world's largest market cap company already.. Zero ...

FRA’s Gordon T Long talks financial repression and the decline in democracy with Paul Craig Roberts. Paul is the chairman of the institute for political economy, he was also the former assistant secretary of the US treasury for economic policy in the Reagan administration.

“As far as I can tell not only has democracy departed the western world but also compassion empathy for others, morality integrity respect for truth justice fairness self-respect western civilization has become a hollow shell there is nothing left but greed and coercion and the threat of coercion”.

He believes this outcome is based on the behavior and statements of the government and the public’s acceptance of it. Part of the reason the public doesn’t care, is due to a lack of information as about 90% of the American media is owned by 6 large mega corporations that manipulate the news.

“The story that is told by the American media is Washington’s propaganda line and of course whatever the corporation’s propaganda line is and there is no challenge to either”.

On the republican debates, Paul questions the aggressive stands that most of the candidates seemed to have towards foreign policy. He states that this stand will simply create distrust among nuclear wielding powers.

“Every American president since John F Kennedy worked with the soviet leadership to diffuse the nuclear issue”.

He says that this shift in culture across the candidates is a combination of both campaign finance and a shift in culture.

“There’s no such thing as a free market in the United States, it requires many producers none of which can affect price…….look at the banks, the banks are so concentrated that they are too big to fail. How do you have capitalism if a failed enterprise doesn’t close down instead it is bailed out by the people or by the Federal Reserve printing money to buy its worthless portfolio. This not capitalism, there’s no capitalism here, this is an oligarchy!”

“What has the government said that’s true? Think of anything, can you think of anything they’ve said that’s true? We know that the unemployment rate they’re reporting is false, inflation rate is false, and the gross domestic product is false. We know all of this, we know that Saddam Hussein did not have weapons of mass destruction, he did not have Al Qaeda connections, that Assad of Syria did not use chemical weapons. We know Russia did not invade Ukraine but they say this over and over and over. I can’t think of one thing that the government or corporate world has said in 20 years that’s true”.

Tipping Points Life Cycle - ExplainedClick on image to enlarge

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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